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Obstacles and Opportunities for Governance Renewal

(Excerpts from a speech to the McMaster World Congress - January 2005)
John Dalla Costa – Centre for Ethical Orientation.

Governance reform is one pillar in the ethical renewal of companies. Many Boards have undertaken serious change initiatives, however pressures for easing accountability are threatening to harden the concrete of corporate practices before the mould for ethical responsibility has been fully shaped.

Corporate governance is no longer a new issue for Boards or regulators, but it is entering a new phase in which the intent and gains of recent reforms may well be put to the test. In January 2005 BusinessWeek reported that pressures for regulatory reform in China are mounting, not simply from external groups like the WTO or investors, but more and more from Chinese innovators and entrepreneurs seeking protections from piracy for their own intellectual capital. Italy’s ethics and governance interest is also awakening from a long, slumber tackling the systemic complacency and cronyism that led to the shocking meltdown of prominent companies like Parmalat. American corporations are feeling the heat – and cost – of finally fulfilling the conditions of Sarbanes-Oxley.

All of this progress suggests a momentum that we must also be cautious about. Governance renewal is very much a marathon and in many ways we are sprinting. We are dashing the hundred meters to make up the distance revealed by corporate scandals. We are going all out to recover the integrity of electronic business squandered so carelessly during the dot.com boom and bust. And we are rushing to create norms and rules for intellectual innovation, like with genetic modification or nanotechnology, which can unleash tremendous good for humanity, the economy and environment, as well as commensurate dangers and harms. We are breathless for the good reason that we need to move fast. The risk in all this forward progress is that we may well burnout before mastering the race we are actually running.

Outrage and vision only carry us so far. Going the distance requires competencies and character for the hard slog of constancy, the hard detail work of consistency, and the alertness and imagination needed for carefulness. From personal experience as well as research, I have identified four impediments to going the distance:

  • Undertow, which is the resistance from the status quo;
  • Fatigue, which is the sense of “enough already;”
  • Over-confidence, which comes from “been there, done that;”
  • And "Siloization", which delegates and also isolates accountability.

1. Governance Undertow

Governance Undertow has been in Canada virtually from day one of this phase of renewal. Within one year of Enron the Canadian Centre of CEOs issued a new set of governance guidelines, reiterating the commitment to a principle-based protocol, and arguing against any new rules or laws. Although the suggestions had some merit, the whole initiative sank – at least in terms of credibility – for being self-generated. CEOs setting norms for CEOs and preaching the reliability of self-monitoring by CEOs will not really engage the credibility issue, nor give much new assurance about serious accountability. A lead story in a recent issue of BusinessWeek explains that the “top priority” of the U.S. Chamber of Commerce is “a push back for changes to Sarbanes-Oxley.” The issue is cost of compliance, which of course is a valid one to discuss. However the intent of push-back, at least in the words of lobbyists, is to undo rather than reframe.

Governance Undertow is significant not only because it suggests that organizational leaders are still uncomfortable with the new yokes of transparency and accountability, but also because the social class of Board Directors is largely drawn from the CEO ranks. As is almost always the case in human history, the governors responsible for governance resist themselves being governed.

2. Governance Fatigue

Companies often adopt the principles for governance change for all the right reasons without realizing the difficult process and cultural adjustments that will be needed to see it through. As John Dinner explains in a recent article in Corporate Governance Quarterly, the diligent implementation of governance may well require Boards to get more directly involved in strategic planning. This requires attentiveness and thoroughness: a necessary exhaustiveness that is undeniably exhausting.

Another fatigue factor is impatience. Organizational researchers explain that many companies give up on renewal because they expect a one-to-one correspondence between effort and effectiveness. In fact, to unlearn dysfunctional assumptions and overcome organizational inertia, it usually takes expending 80% of the change effort to get 50% of the change results. Most companies burnout long before that, but the few that make the difficult climb to the mountain top get the exhilaration of half the results for a fifth of the work. This is what we usually call momentum. The third fatigue factor is frivolousness. Many companies turn to governance reform when publicly embarrassed. As long as the heat is on they repent. Once the attention cools, they slip back into less than exemplary habits. The Business Ethics Institute in Washington D.C. has a study that shows that as many as 80% of companies that adopt ethics reforms in response to a scandal tire of the commitments within two years, and mostly return to business as usual. About two-thirds transgress again the code, rule or law that got them in trouble in the first place.

3. Governance Overconfidence

Part of the wear-out for interest in governance has to do with misperceptions held by either advocates or critics. One overestimates company virtuousness. The other underestimates the scale and stakes of the problem. Over-estimators believe that adopting the code or best practice is equivalent to becoming a best practitioner. Under-estimators believe that the distance to be covered is less than it is, and therefore expect getting to the finish line will be easier than the reality.

I interviewed 25 CEOs about the state of trust in Canadian society. Most recognized that there are pressing credibility problems for companies and their Boards. Most also admitted some changes were necessary to address suspicion and re-earn trust. However, the quantitative component of the trust research revealed a wide gap between perceptions from those at the top of organizations and the larger world of employees, customers and the public. CEOs tended to see a smaller issue with quicker fixes; the average Canadian sees a much more serious rupture, and hope therefore for much more substantial reform. This gap matters profoundly because it means that our business leaders are still leaning on high trust solutions to engage much less trusting stakeholders. An integrity office will not have much impact if the office itself is suspect. Nor will transparency alone win trust if the information flow is still one way and controlled by those doing the disclosure. Over-estimators derive false confidence from under-estimating the demands of virtue. Under-estimators derive false confidence from over-estimating their own virtue.

4. Silos

In many companies silos are the bane of expertise. As soon as we admit to a need, we tend in organizations to create departments to house that competence, and processes for leveraging it. In the short-term this expresses commitment and gains critical mass. Over the longer-term, this very institutionalization becomes a liability. This is what happened in business ethics. Companies, especially in the U.S., hired Ethics Officers, created departments and training programs, and published standards. Created to correct the excess of expediency, Ethics Offices now increasingly are subject to the very criteria they are meant to moderate. Few are profit centers. Most are simply costs. Subject to this calculus of performance, Ethics Offices have been largely marginalized in companies. Few Ethics Officers report to a CEO. Few Ethics Office have input into strategy, product development or customer relations. Most are now subsets of the corporate legal office, satisfying terms for compliance. The need has not gone away, but the expertise - under pressure from cost-cutting and efficiency - has all too often retreated into silos of self-preservation.

Governance is the new version of business ethics, yet it too – as we have heard from BusinessWeek - is under attack for implementation costs and perceived inefficiency. Over time the governance experts will perhaps be granted the double-edged privilege of their own department. Over time they too may suffer the mission-retreat of simply ensuring compliance. Over time governance, like Corporate Social Responsibility and Ethics, may have its own silo.

Staying Steady and True

The great medieval scholastic and theologian Thomas Aquinas taught that to fully understand any virtue we must also study its corresponding vice. I have in a sense reversed that methodology, exploring the obstacles that defeat constancy to help define the terms for consistency.

  • If Undertow recognizes the endemic nature of resistance to governance, then our task is to engage this resistance endemically and systematically. I call this Discovery through Divergence.
  • If Fatigue recognizes that systematic change requires a disproportionate effort to get traction and momentum, then our task is to grow capacities for tenacity. I call this Double Due-Diligence.
  • If Overconfidence fuels complacency, then we must strengthen the fiduciary exercise of carefulness. I call this Duty to the Details.
  • And finally, if Silos defeat synergy, which they do, then our task is to defeat silos through rigorous co-engagement. I refer to this as Deep Dialogue.

Discovery through Divergence fuses two principles: the deliberate and disciplined practice of discovery, and the open and active engagement not only of diversity but also of real difference and divergence. Discovery is a creative act. While most governance reform is predicated on catching-up to new public or regulatory expectations, discovery probes the horizon for future risks and opportunities. It is the precursor to vision or long-term planning, a SWOT analysis not so much for strategy as for defining the particularities of trust, integrity and accountability. By discovery Boards co-define what they mean by governance, creating the vocabulary and culture for exercising a proactive rather than reactive discharge of duties. This brings precision to norms that are all too often generic. And it involves Board members in practicing the very radar skills that governance presumes.

For discovery to stand up to the demands of integrity it must be multi-dimensional, inspired and tested in the public space. This is the principle of divergence. In their research on ethical excellence, Howard Gardiner and Mihaly Csikszentmihalyi show that moral coherence cannot be self generated. In bioethics, for example, it is important for individual scientists to have highly developed ethical values and sensibilities, but this is not enough. These personal ethics need to be tested and endorsed by a second sphere, in this case the professional body setting standards and monitoring the adherence by individuals. Much of the heavy lifting for governance happens in this interaction between practitioners, with often diverse views having to be heard and in some way addressed. However, even this divergence between professionals may not be enough. Too often, expertise creates narrow reference points, like with CEOs who define their own terms for governance integrity. A third sphere becomes essential, which is the moral conventions and expectations of society at large.

Individual experts have credibility when they operate within the norms of the professional body and represent the interests of the public whose trust they hold. Professional bodies have credibility when they effectively lead the development of individual experts while responding to values and needs of society. And the public develops confidence and extends trust when it has proof that concerns have been seen and heard, and the professional conduct is being updated and monitored.  

For Boards, Discovery through Divergence means aggressively pursuing much more radical diversity among Directors, not only other CEOs who may be women and minorities, but also dissident voices from entirely other professions and spheres. As many of us already know, some companies like Shell and BP actually include their critics and activists on governance panels and advisories. Other companies like Medtronics reserve Board seats for non-business experts whose discipline or experience may open new windows for discerning governance problems or performance opportunities.

Governance is fatiguing work because it takes both a highly imaginative envisioning of principle, with clear-headed attention to details in practice. You cannot escape fatigue when the issues are so complicated, but you can build confidence to see it through by rigorously practicing Double Due Diligence. Due Diligence is a statutory stipulation of governance. In the virtues language of Aquinas, Due Diligence means more than reasonable analysis, involving both prudence, which can be defined as profitability with propriety, and fortitude, which can be defined as strength with courage. Double Due Diligence does not literally mean multiplying the reps like in an exercise regimen. The Doubling factor, in Aquinas’ terms is from intent. To what aim are we investing the terms and outcomes of governance? We are all interested in some aspect of corporate excellence, either improving performance by refurbishing trust, or ensuring the accountabilities that advance the ethical and social results of companies along with their profits and growth. In all honesty, this may be enough governance for recovering sufficiently from scandal, but it will not be enough to proactively address the future challenges of sustainability and global equity. Again, this is not to presume business must find solutions to all injustice. Rather, Double Due Diligence recognizes that there are no viable solutions to the world’s injustices without the involvement of business, and that companies cannot expect stability without some role in stabilizing the natural and social environment.

Carefulness is another legal stipulation for Directors. It is important to recognize that this stands as a separate expectation for fiduciary responsibility from reasonableness. It is not a synonym but a complement. While reasonableness requires deliberate analysis, carefulness requires deliberate vigilance.  Reasonableness is a norm. Carefulness is a conduct. This is what I mean by Duty in the Details. One of the most startling findings in our national trust study was that Canadians suggested scandals had little to do with the precipitous drop in their confidence towards public institutions and corporations. Eight in ten believe strongly that trust has declined, but for the most part the high profile scandals have only confirmed what Canadians have been experiencing personally for most of the last decade. Trust in the workplace has fallen because of the countless indignities and pressures that employees have had to absorb in the guise of restructuring, reengineering and competitive renewal.

Trust among consumers and customers has dropped, even for some icon brands like Coke, McDonald’s and Disney, because the experience of service is often depersonalizing. High value relationships with banks or airlines or communications companies have also taken a hit, often because the technology that cuts costs for the companies, like auto phone attendants, increases stress and inconvenience for customers. Trust towards government, the military, religions and institutions like education have of course been impacted by scandal, but here again Canadians felt that these only reinforced other more frequent experiences of botched small promises, or outright irrelevance. Carefulness is a poignant word and powerful concept that goes to the very heart of confidence. In the human terms of trust, carefulness is a practical exercise in hope.

In terms of governance and Director accountability, carefulness is Duty in the Details. Again, both dynamics are important: Duty when discharging responsibility of the public trust not only fulfills an expectation or solemn promise but actually sustains social hopefulness. This is the true antidote for suspicion. Attention to Details, usually assumed as a role to delegate to management role, actually has governance implications, especially in accounting for links between causes and effects, and even unintended consequences. This concern for detail is proof for performance. It is only when we past the test combining the loftier perspective of Duty with the messier reality of Details that we pass the test of integrity.

We all have experience with silos, in companies, in society, and often even with personal attitudes or ideologies. My view is that silos are much more wasteful and destructive of corporate performance than outright fraud or impropriety. Silos are an ethical issue because they are often premised on fear or mistrust, and often compound inefficiency, foil communication, and protect those responsible from accountability. Board Rooms are often silos. When Directors have most let down investors and stakeholders, as with Hollinger or Nortel, Boards have usually been isolated and insulated from the larger social reality in which operations function and trust is earned. Silos seem as hard and lasting as concrete, and very few companies have successfully breached their walls, even when they stand in the way of performance or viability.

We diagnose them much more effectively than we disassemble them. However, recent human history provides a hopeful example for penetrating silos. For example, for the velvet revolution in Eastern Europe, the acid dissolving concrete walls was formulated of fresh ideas. In practice, my academic friends at the Institute of Economical Dialogue Temple University call such transformative engagement of ideas Deep Dialogue. Most Boards know how to debate. Most know how to discuss. And most know how to decide. But very few have devoted time or developed skills for real, affective dialogue.

The technology of Deep Dialogue involves a specific process for critical thinking, and a specific process for creative reflection. Much of the usual Board agenda is dedicated to decision-making. And for efficiency the process is often by persuasion and ratification. With Deep Dialogue the framing and analysis is less linear and monologic, and much more circular and inviting of dissent. The open exchange of fresh ideas is not to thwart decision-making, but rather to enrich the understanding of implications. A regular scheduled Board meeting may not be the forum for Deep Dialogue. We may need to create pre-and-post meeting events for it. But the point is that without real dialogue, Boards are exercising decision-making without really exercising their fiduciary duties.

To summarize:

We are entering a critical new phase of governance renewal. The early impetus from scandal and new regulation is wearing thin. We are now in the tough phase of implementing with constancy and consistency. There are difficult obstacles in this run.

  • Governance Undertow, which seeks to roll back supervision implications;
  • Governance Fatigue, which comes from the range of the necessary work;
  • Governance Overconfidence, which comes from the presumption that thin codes and practices are all there is to it;
  • And Siloization, which assigns accountability to some experts in their own ghetto.

For effectiveness and persistence, we must honestly engage the resistance – and resistors – of Undertow. We need also at this time to double our resolve, resourcefulness and contributions, to fight fatigue and refresh relevance. A key factor in this is to reanimate the foundational precepts of governance, providing definition and examples to practical ideals like duty, prudence, balance, carefulness and justice. The goal is not to impose more conditions, but to facilitate richer and more responsible dialogue.



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